Climate Risk Regulation Rundown: February 2023

March 9, 2023

What happened in climate-related financial regulation last month, and what’s coming up.


On February 14, US President Joe Biden appointed Lael Brainard, a vice-chair of the Federal Reserve, to serve as director of the National Economic Council (NEC). Brainard was a climate hawk during her time at the Fed, making speeches on the importance of climate-related financial risk management for banks and helping to lay the groundwork for the central bank’s climate scenario analysis exercise, which is taking place this year.

“Financial market participants that do not put in place frameworks to assess and address climate-related risks could face significant losses on climate-sensitive assets caused by environmental shifts, by a disorderly transition, or both,” Brainard said in March 2021.

The NEC advises the president on US and global economic matters. Brainard succeeds Brian Deese as director of the organization. Deese was instrumental in shepherding the Inflation Reduction Act, which contains hundreds of billions in climate-related tax credits and incentives, through Congress last year.

In a February 10 speech, Commissioner Christy Romero of the Commodity Futures Trading Commission (CFTC) said the agency should increase its enforcement resources to combat greenwashing in the financial markets it oversees.

“Whatever the label used — greenwashing, fraud, or misrepresentation — these can all lead to serious harm, distort market pricing, seriously damage a company’s reputation, and undermine the integrity of the markets,” she said. 

Romero also proposed that the CFTC monitor climate-related financial risk to commodities and derivatives markets, as well as partner with exchanges and market participants to boost the integrity of derivatives markets and promote responsible innovation in climate/sustainability products.

She added that voluntary carbon credits “carry particular concerns of greenwashing, fraud, and manipulation” and are under scrutiny from environmental and regulatory groups.

The CFTC oversees US commodities and derivatives markets, including swaps, futures, and some options. Carbon credit trading is classified as a commodity, meaning it falls under the CFTC’s jurisdiction.

The Securities and Exchange Commission (SEC) said it will continue its crackdown on dubious environmental, social, and governance (ESG) activities by financial institutions.

In an announcement on its 2023 priorities on February 7, the agency’s Division of Examinations said it would police “ESG-related advisory services and fund offerings.” For example, it said it would ensure ESG services and offerings are operating in the ways they’re described in their public disclosures. The division also noted it would check whether ESG products are labeled appropriately and whether they’re being recommended in retail investors’ best interests.

The Division of Examinations is responsible for running compliance exams of SEC-registered entities, including investment advisers and broker-dealers. These exams ensure market participants are operating in line with federal securities laws and regulations.

On February 2, the SEC published its annual report on Nationally Recognized Statistical Rating Organizations (NRSROs), which includes credit ratings agencies. The report highlights how NRSROs continue to develop ESG ratings and other products that are not directly regulated by the SEC. It also explores how the marketing and development of these “may result in conflicts of interest.”

For example, an NRSRO may be pressured to give a firm a higher ESG rating than its actions deserve if it is also a client of the NRSRO.

The Government of Canada issued disclosure requirements for major federal contracts on February 28.

Under the ‘Standard on the Disclosure of Greenhouse Gas Emissions and the Setting of Reduction Targets,’  companies with contracts over CAD$25mn will be required to report their greenhouse gas (GHG) emissions and set credible reduction targets. The standard takes effect April 1.

The requirements are part of Canada’s Greening Government initiative, which commits the federal government to achieve net-zero emissions by 2050 and climate-resilient property operations by 2050.


The European Parliament struck a deal on the European Union Green Bonds Standard (EUGBS) on February 28.

The standard, which is voluntary, is supposed to clarify what debt instruments can truly claim to benefit the environment. Under the agreement made by lawmakers, firms that issue bonds using the standard will have to report how the proceeds will be deployed, and how the use of proceeds furthers their own climate transition plans. To be eligible for the standard, the proceeds will have to be invested mainly in projects that are aligned with the European Union’s (EU) Sustainable Taxonomy, which dictates what activities are environmentally friendly. Only 15% of the proceeds of a EUGBS instrument are allowed to be spent on activities that don’t currently fit with the taxonomy’s criteria.

The standard will now go to the European Council and Parliament for final approval. 

On February 9, members of the European Parliament’s environment committee voted to enhance climate protections as part of the proposed Corporate Sustainability Due Diligence Directive (CSDDD). 

This directive would compel European Union (EU) companies in “high-impact sectors” — including agriculture, mining, quarrying, oil and gas extraction, and certain manufacturing activities — to identify “adverse environmental impacts” across their value chains.

The environment committee voted to adopt its “opinion on the [CSDDD] file.” The legal affairs committee will now finalize work on the directive ahead of a vote of the full Parliament around May. The directive will then be negotiated between the European Commission and Council.

The European Securities and Markets Authority (ESMA) highlighted greenwashing in sustainable financial product markets as a growing concern in its most recent Trends, Risks, and Vulnerabilities report, which was published on February 9.

The regulator explained that investors face “potential risk” from fund providers that misuse the EU’s Sustainable Finance Disclosure Regulation (SFDR) as a “marketing tool.” The SFDR forces financial institutions to disclose the sustainability characteristics and/or sustainability investment objectives of their funds and products, though it has been used as a de facto ESG labeling system by many providers.

“SFDR was not intended to be a labeling regime and does not include the type of requirements usually attached to voluntary labels, prompting further concerns of potential greenwashing,” the report says.

On February 13, the European Banking Authority (EBA) launched a survey on banks’ green mortgage and loan products, as well as market practices related to these instruments.

It follows a “Call for Advice” from the European Commission on how to define green loans and mortgages and support their provision to retail and small- and medium-sized entities. It asks the EBA to provide a snapshot of existing market practices, explore a green loan definition based on the EU Sustainable Taxonomy, recommend efforts to boost the uptake of green loans, and fact-find on the green loan origination process.

The survey closes April 7.

On February 6, the European Insurance and Occupational Pensions Authority (EIOPA) issued a report describing the results of a pilot exercise on how climate-related adaptation measures influence non-life insurance contracts.

The regulator defines these as “structural measures and services” applied to a policyholder’s property ahead of an insured event to make it more resilient to physical climate risks. For example, some of these measures may include alert and warning systems against extreme weather events or anti-flood shutters for homes.

EIOPA said only 23% of European losses from extreme weather and climate-related events are insured, producing a “substantial insurance protection gap,” which is likely to grow as climate change progresses.

The exercise, which included 31 volunteer insurers, asked the firms questions on the influence of climate change on non-life insurance businesses, as well as on the implementation of climate-related adaptation measures. It also asked firms to offer their views on the underwriting and regulatory capital effects of these measures.

In the report, EIOPA said it sees “further room for improvement” on standardizing the implementation of climate-related adaptation measures and will endeavor to raise public awareness on climate risks and related prevention measures.

The European Securities and Markets Authority (ESMA) held an open hearing on its proposed ESG fund labeling guidance on January 23.

Last November, the regulator published recommendations stating that funds should only include ESG terms in their names and marketing materials if at least 80% of their investments have environmental or social characteristics or sustainable investment objectives that they’ve disclosed under the Sustainable Finance Disclosure Regulation (SFDR). The regulator also said the term “sustainable” should only be used by funds that have half of their assets invested in sustainable investments that have been disclosed under the SFDR.

The comment period for ESMA’s guidance closes February 20.

France’s financial regulator Autorité des marchés financiers (AMF) said the European Commission should overhaul the SFDR to require so-called Article 9 (dark green) funds to exclude fossil fuel-linked assets.

In a position paper, the AMF said the regulation has “created a gap between the reasonable expectations expressed by investors and the reality of the practices” in relation to sustainable investing. Furthermore, it has “fuelled the greenwashing” of products through its reliance on “vague terms” instead of strict requirements.

The regulator recommended the European Commission introduce “minimum standards” for both Article 9 and Article 8 (light green) funds and to clarify the definition of “sustainable investment,” so that it is based on “objective requirements.”

For example, the AMF says Article 9 funds should “exclude investments in fossil fuel sector activities that are not aligned with the EU [Sustainable] Taxonomy.” As for Article 8 funds, the AMF says they should only invest in fossil fuels with strict conditions attached.

The UK Financial Conduct Authority (FCA) published a discussion paper on financial institutions’ sustainability-related governance, incentives, and competence on February 10.

The analysis embodies the FCA’s efforts to spotlight evolving best practices and to gauge the need for further sustainable finance regulation. The paper explores how governance, incentives, and competence are seen through the lens of the Task Force on Climate-related Financial Disclosures (TCFD) and how expectations on firms are changing in the wake of initiatives launched by the International Sustainability Standards Board, the Transition Plan Taskforce, and the Glasgow Financial Alliance for Net Zero. 

The paper looks into firms’ sustainability objectives and strategies and explores how asset managers and asset owners organize and oversee their stewardship activities. In addition, it includes a review of relevant literature and the results of the FCA’s own analysis of a sample of firms’ sustainability disclosures. 

Interested parties are invited to respond to the FCA’s paper by May 10.

On February 22, The Pensions Regulator (TPR) launched a campaign to scrutinize UK pension trustees’ climate and ESG reports.

TPR sent emails to defined benefit, defined contribution, and hybrid schemes, saying it plans to study trustees’ published reports to ensure they meet new reporting standards. The regulator also said it will check that trustees issue required investment principles and implementation statements.


China is considering mandatory ESG disclosures for listed companies, Bloomberg reported on February 22.

Sources told the publication that the country would start by designing an internationally recognized disclosure standard and requiring companies to follow it on a “comply or explain” basis. Mandatory disclosure requirements would then be phased in over time. State-owned Chinese companies are expected to begin making ESG disclosures as soon as the end of 2023.

The Reserve Bank of India (RBI) will issue guidelines for regulated financial institutions on disclosing climate-related financial risks and running climate scenario analyses and stress tests. It will also outline a framework on green deposits, which banking clients can use to ensure their funds are put to work for environmental purposes.

The announcement was made in a statement by RBI governor Shri Shaktikanta Das on February 8.


On February 17, the International Sustainability Standards Board (ISSB) announced its global climate and sustainability disclosure rules would go into effect starting January 2024.

At a meeting in Montreal the board finalized the technical aspects of its standards, which it intends to act as a “global baseline” for climate and sustainability reporting. The standards will undergo a last polish before their expected release in June this year. 

The January 2024 start date reflects “strong demand” from investors and standard-setters to end the current patchwork of sustainability disclosures, which are currently confusing investors, the ISSB said.

US President Joe Biden nominated Ajay Banga to lead the World Bank.

Banga, an Indian-American businessman who currently serves as vice chairman at General Atlantic and was previously Mastercard’s CEO, would replace David Malpass, who came under fire last year for failing to state that fossil fuels drive climate change.

Banga has spoken out in favor of greater climate action in the past, including while at Mastercard, where he called for companies, communities, and consumers to “find paths for collective action on climate change.” 

On February 20, the Financial Stability Board (FSB) laid out its work program for 2023. 

It said it would continue addressing climate-related financial risks “through enhancements to disclosures, data and analysis of climate-related vulnerabilities.” Part of this work will include looking at how financial institutions can deploy climate transition plans to manage transition risks that may threaten financial stability.

The Network for Greening the Financial System (NGFS) launched a consultation on the climate scenarios it produces for central banks and supervisors. The exercise will be used to inform the network’s development of these tools. 

The group of climate-focused central banks and financial regulators published its first batch of climate scenarios for financial institutions in 2020 and two follow-up sets in 2021 and 2022 respectively. The latest set includes orderly and disorderly transition risk scenarios, as well as two “hot house world” scenarios that assume global temperatures well exceed the 2015 Paris Climate Agreement targets.

The NGFS consultation closed on February 27.

The Loan Market Association (LMA), a standard-setter for Europe’s syndicated loan market , issued updated principles for originating green, social, and sustainability linked-loans (SLL) on February 23.

The three sets of principles are voluntary but are intended to standardize and give credibility to the emerging range of loan structures that have been designed to further climate and social efforts. Entities that subscribe to the principles are expected to adopt the updates for all instruments originated, extended, or refinanced after March 9.

The green loan principles concern deals that “support borrowers in financing environmentally sound and sustainable projects.” This may include projects that promote a net-zero economy, the environment, and/or climate adaptation. The social loan principles are for deals that support eligible social projects, while the SLL principles cover instruments that incentivize borrowers to achieve “material, ambitious, pre-determined, regularly monitored and externally verified sustainability objectives.” They do this by linking the repayment rate to predetermined key performance indicators and sustainability performance targets.

The LMA said the updated principles are warranted due to the “recent market developments across global sustainable finance markets.” The standards were produced in concert with the US-based Loan Syndications and Trading Association and the Asia Pacific Loan Market Association.